We provide empirical evidence on the positive effect of non-executive employee stock options on corporate innovation. The positive effect is more pronounced when employees are more important for ...innovation, when free-riding among employees is weaker, when options are granted broadly to most employees, when the average expiration period of options is longer, and when employee stock ownership is lower. Further analysis reveals that employee stock options foster innovation mainly through the risk-taking incentive, rather than the performance-based incentive created by stock options.
Prior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true ...on the grant date, it is not over the life of the option grant. Very little of the initial advantage remains after 2 years because Asian stock options have diminishing incentive effects over time. A simple solution is to replace averaging over the option's life with averaging over a moving window. We show that moving average options do not have the diminishing incentive problem and are effective in preventing managerial gaming.
Infusing stakeholder agency theory with insights from behavioural agency theory, we describe a frame‐dependent relationship between CEO stock option incentives and tax avoidance. Our theoretical ...framework highlights the role of competing shareholder demands in providing a salient reference point for a CEO contemplating the implications of tax avoidance for their stock option wealth. In a study of 2,573 publicly listed U.S. firms between 1993 and 2014, we show that the implications of CEO stock option incentives are contingent on whether the firm’s effective tax rate is anticipated to be below or above the tax rate of peer firms – an outcome that the CEO can cast as balancing stakeholder demands. Consistent with our theoretical reasoning, we also show that, both above and below this reference point, the implications of option incentives for corporate tax avoidance are amplified by the level of activist institutional ownership and attenuated by the CEO’s ability to unwind their bond with shareholders through hedging. In doing so, our study offers an impetus for a broader stakeholder approach to governance research examining CEO incentive alignment.
We show that in the years following a large broad-based employee stock option (BBSO) grant, employee turnover falls at the granting firm. We find evidence consistent with a causal relation by ...exploiting unexpected changes in the value of unvested options. A large fraction of the reduction in turnover appears to be temporary with turnover increasing in the third year following the year of the adoption of the BBSO plan. The increase three years post-grant is equal in magnitude to the cumulative decrease in turnover over the three prior years, suggesting that long-vesting BBSO plans delay, instead of prevent, turnover.
I study the role of external auditors in the diffusion of stock-option backdating in the U.S. to explore the role of professional experts in the diffusion of innovative practices that subvert ...stakeholders’ interests. Practices that are eventually accepted as misconduct may emerge as liminal practices—ethically and legally questionable but not clearly illegitimate or outlawed—and not be categorized as misconduct until social control agents notice, scrutinize, and react to them. I examine how the role of external auditors in the diffusion of stock-option backdating changed as the practice shifted from liminality to being illegal and illegitimate. The findings suggest that professional experts’ involvement in the diffusion of liminal practices is highly responsive to the institutional environment. Initially, professional experts diffuse these practices via local networks, but when the legal environment becomes more stringent, implying that the practice will become illegitimate, experts reverse their role and extinguish the practice. The larger network remains largely uninvolved in both diffusing and extinguishing the liminal practice until the practice is publicly exposed and labeled as illegal and illegitimate. The findings further show that the diffusion and then extinguishing of backdating before it was outlawed depended on the adopter’s geographic proximity to a local office of a complacent expert and on the absence of traceable communication about backdating between these offices. This combination set the stage for each office to develop independent views about backdating, leading some offices to view backdating favorably and diffuse it, and others to view it unfavorably and curtail it—even at the same time and within the same audit firm. This study contributes to research on the diffusion of misconduct by providing insight into the role of professional experts and the mechanisms and boundary conditions governing that role.
We examine a continuous-time principal-agent problem under mean-volatility joint ambiguity uncertainties. Both the principal and the agent exhibit Gilboa–Schmeidler’s extreme ambiguity aversion with ...exponential utilities. We distinguish between expost realized and exante perceived volatilities, and argue that the second-best contract necessarily consists of two sharing rules: one for realized outcome and the other for realized volatility. The outcome-sharing rule is for uncertainty sharing and work incentives, as usual, and the volatility-sharing rule is to align the agent’s worst prior with that of the principal. At optimum, their worst priors are symmetrized, and realized compensation is positively related to realized volatility. This theoretical positive relation can be consistent with popular managerial compensation practices such as restricted stock plus stock option grants. A closed-form solution to a linear-quadratic example is provided.
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